The pros and cons of a Fed interest rate hike
The Federal Reserve has all but broadcast its intention to hike its benchmark interest rate for the first time in nearly a decade come Wednesday, and most Fed watchers view an increase to 0.25 percent from the current zero percent a near certainty.
Whether a rate increase is a good thing or a bad thing is another matter. Here are the major arguments for both sides:
A rate hike is a good thing
1. The U.S. economy. America has recovered from the Great Recession, even if the rate of growth has often seemed anemic. The November jobs report had the unemployment rate holding unchanged at 5 percent, a seven-year low. The U.S. economy increased at an average 2.3 percent in the first two quarters of 2015, and increased at a 1.5 percent annual rate in the third, according to the Commerce Department's estimate.
2. Psychology. If the Fed backed off from its much-anticipated move, the signal would be obvious: The nation's central bankers were not confident the U.S. economy is strong enough to handle what in reality is a slight increase in borrowing costs. That could rattle the markets and even shake consumer confidence at a particularly dicey time, as holiday spending is key for the overall economy.
3. Reputation. Fair or not, many Americans already hold a dim view of the Fed. But if the Fed opts out of taking an initial step towards "normalizing monetary policy," as banking wonks put it, the central bank would lose credibility, given the many months of public prepping for a rate hike offered by Fed Chair Janet Yellen and her colleagues. Yellen said earlier this month that she views the Fed's economic outlook as "very close to balanced," which most analysts took as another signal a hike is coming.
A rate hike is a bad thing
1. Inflation. While the Fed is near, or at, its target unemployment rate when it comes to encouraging growth in the U.S. labor market, its official policy goal of 2 percent inflation has not materialized. Wage growth has been muted in this recovery. Energy costs are contained, with crude-oil prices lately at a six-year low. If anything, the Fed has more often had to contemplate deflation -- or prices and wages falling in a depression-like spiral -- than worry about costs getting out of hand.
2. Timing. The Fed opted not to make a move three months ago, and the same reasons the central bank cited for not increasing rates then remain in play now. In September, markets were rattled by concerns about China's economy and sliding oil prices. Today, China -- the world's second-largest economy -- is still showing signs of slowdown and the price of crude this week flirted with an 11-year low. And yes, markets are still volatile.
3. High-yield bonds. Investor unease in this niche of the corporate bond market most vulnerable to higher U.S. interest rates has startled Wall Street of late, with junk bonds in particular showing signs of distress. The scenario reminds some market observers of the mortgage-backed troubles of early 2007, when the housing blowup was starting.